Managers positive on EU financials despite downgrades

By: Madison Marriage | 09 Dec 2011

Managers believe the European financials sector is undervalued, despite ratings agencies Moody’s, S&P and Fitch collectively downgrading or placing on credit watch negative several major European financial groups.

On the morning of December 9 Moody’s announced it had cut the credit rating of three of France’s largest banks (BNP Paribas and Credit Agricole from Aa2 to Aa3 and Societe Generale from Aa3 to A1).

Fitch added to the French banking offensive by revising Oddo et Compagnie’s outlook to negative from stable. Fitch said this was driven by the declining trend in revenues in a difficult operating environment that will likely extend into 2012.

Oddo’s corporate and investment banking division has reported a gradual decrease in revenues in all its business lines, Fitch noted, adding that the decline of market values will negatively impact the assets under management of its €20bn asset management division which would in turn affect management fees.

Earlier this week Standard & Poor’s (S&P), having already announced the credit rating of France, Germany and another 13 eurozone nations could be cut by up to two notches, placed a number of European banks under credit watch negative to reflect the potential sovereign downgrades.

Banks targeted by S&P include major European institutions such as France’s BNP Paribas, Natixis, Credit Agricole and Societe Generale, Germany’s Commerzbank and Deutsche Bank and Italy’s UniCredit.

Despite this stream of bad news for Europe’s banking groups, many fund managers believe they can offer interesting investment opportunities as Europe’s banks are trading at a deep discount to value.

Interestingly, in the immediate aftermath of Moody’s announcement on December 9 the share prices of all three French banks began trading higher than at market close on December 8.

At the time of writing Societe Generale was trading at €19.56, up 2.38%, Credit Agricole at €4.8, up 4.13% and BNP Paribas iat €31.96, up 2.73%.

Oddo et Cie, the subject fo Fitch’s scrutiny, is hoping to take advantage of what such “excessively” undervalued bank stocks by launching a new equity fund, Oddo European Banks.